We investigate the effect of changes in capital regulation on the strictness
(leniency) of loan terms using a simple model of bank capital requirements and
asset quality examinations. Banks offer different levels of "leniency" in the sense
of willingness to offer automatic extensions of loans in the presence of temporary
payment difficulties of borrowers. Banks offering lenient (less strict) loan terms
must have higher initial levels of capital and charge higher loan rates. When
capital requirements are increased, both strict and lenient banks hold higher levels
of initial capital and they raise loan rates. As capital requirements increase the
difference between initial capital levels and between interest rates of strict and
lenient banks decrease. Thus, higher capital requirements in recessions tend to
reduce the interest rate premium paid for leniency. If a recession is interpreted as
an increase in the required return, the interest rate premium paid for leniency is
increased in recession at a given level of required capital.

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Abstract: Price correlations are used to delineate the geographic market in two
recent Danish electricity cases. They indicate that power generators hold temporally
transitory and irregularly intermittent dominant positions. Calculation of the Lerner
index reveals that they abused this position. The Danish Competition Authority
decided to settle this case by agreement for reasons explained. We finally indicate
how economics may be used pro-actively to achieve a better market design.

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Contracts and exits from a sample of 179 investment rounds in 132 entrepreneurial firms
by 17 European venture capital (VC) funds are analyzed. The data indicate the financial contracts
are quite heterogeneous in terms of both the cash flow and control rights. The use of different
securities by European VC funds does not depend on the definition of venture capital, and the
securities used are not functional equivalents. A normative empirical analysis of exit shows the
likelihood of different types of exit vehicles (IPO, acquisition, and liquidation) and the returns to
venture capital depend on not only firm specific characteristics but also the allocation of cash
flow and control rights.
Keywords: Venture Capital, Financial Contracting, Exit, IPO, Acquisition
JEL Classification: G24, G28, G31, G32, G35

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Limits on Economic Harmonization in The United States and The European Union

Sweeney, Richard J.(København, 2003)

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Abstract:

The U.S. Constitution importantly limits the degree to which the federal government
can impose harmonization across member states. This paper reviews these limitations and
how they have evolved substantially over time in the U.S. It also discusses some of the
benefits and costs of such limitations, and argues that the EU may benefit from adopting
similar limitations. Harmonization of EU tax codes is likely to be economically harmful. On
theoretical grounds, tax rates are likely to be harmonized at a common rate that is higher than
optimal for the EU. This suggests the benefits of constitutional provisions that make tax
harmonization difficult to impose. Other types of harmonization have a less clear-cut costbenefit
analysis. A federal commercial code that is uniform across member states reduces
transaction and information costs, compared to leaving important code issues to member
states; further, many states may keep codes for long periods that are sub-optimal compared to
a given federal code. A federal code may, however, fit poorly with other institutions of
member states, potentially causing large costs. Leaving codes to the states leads to
competition across states, and may generate forces for change for the better. Competition also
generates information about the effectiveness and costs of different commercial codes.
Because any country’s initial code is likely to be sub-optimal, and is likely to become less
optimal over time, information on how to improve codes is valuable. Likely it is easier to
learn and adapt from member states than from other countries.

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The ambiguity in existing empirical work with respect to effects of deposit insurance schemes on banks’ risk-taking can be resolved if it is recognized that absence of deposit insurance is rarely credible and that the credibility of non-insurance can be enhanced by explicit deposit insurance schemes. We show that under reasonable conditions for effects on risk-taking of creditor protection in banking, and for effects on credibility of non-insurance of explicit coverage of deposit insurance schemes, there exists a partial level of coverage that maximizes market discipline and minimizes moral hazard incentives for risk-taking in banking. Using both the occurrence of banking crises and non-performing loans in the banking sector as proxies for excessive risk-taking the results strongly support this hypothesis in industrial and emerging market economies. Policy recommendations on the country level require analyses of institutional factors affecting the credibility of non-insurance. In particular, the implementation of effective distress resolution procedures for banks would allow governments to reduce explicit deposit insurance coverage and, thereby, to strengthen market discipline.
JEL Classification: G21; G28; F43
Keywords: Deposit Insurance; Banking Crisis; Insolvency Procedures, Market Discipline

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In the 1990s, most of the Central and Eastern European countries (CEECs) went through
radical liberalization and adopted large-scale economic and political reform programs. These
programs included almost complete price, trade and capital movement liberalization,
macroeconomic stabilization, currency reform, and small-scale and large-scale privatization.
What is the role of the development of a legal and institutional infrastructure along with these
radical changes in society and the economy? The first part of this paper is based on the results
of an interview study of entrepreneurs and managers in Estonia undertaken in 1998 and in
Estonia, Russia, Finland and Sweden in 2000 in order to obtain their view of the behavior of
government agencies, lawmaking procedures and the operation of law enforcement
mechanisms.
The second part of this paper presents summary results from interview surveys of Estonian
manufacturing firms undertaken from 1994-2000. The surveys were designed to
quantitatively measure the state of and changes in the Estonian business environment,
focusing on the key aspects of financial contractual relationships of Estonian manufacturing
firms as well as regulation and dispute resolution mechanisms. Among the observations it is
noted that government regulations do not seriously affect business decisions regarding the
operation, expansion or closing down of Estonian manufacturing firms. A second observation
is that the Estonian court system is perceived as inadequate for resolving a substantial number
of disputes and conflicts among economic agents although legislation exists. Most firms rely
on mechanisms of self-enforcement when possible.
Journal of Economic Literature Classification numbers: K42, K49, G18, G30
Keywords: business environment, corporate financial relationships, enterprise restructuring,
corruption, law making procedures, law enforcement.

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Does wrongful conviction lower deterrence and can this explain society’s aversion to
sanctioning the innocent? This paper argues that for some of the most important
categories of crime such as murder, assault or robbery, the answer to both questions is
no. For these categories of crime, a potential offender need not fear wrongful
conviction for any particular criminal act he or she chooses not to commit. For
example, if a potential offender decides not to murder another person, he or she
should not fear being wrongfully convicted of it, since the person will not be dead,
and there will therefore be no investigation and no trial. He of she may risk being
wrongfully convicted of another crime, but that risk exists independently of his or her
own actions.
It may be argued that wrongful conviction lowers deterrence in more indirect ways.
First, the possibility of being sanctioned for a crime one does not commit may lower
the threat of being sanctioned for a crime one commits, if two sanctions are not twice
as threatening as one. Second, if wrongful conviction halts further investigations that
may lead to the true offender, and third, if a potential offender thinks that if he or she
does not take advantage of a crime opportunity, he or she may be wrongly convicted
in the event that some other person grasps the same opportunity. However, it will be
argued that wrongful conviction may also increase deterrence, and the three indirect
effects are in any event unlikely to be quantitatively important in the real world.
An implication of the present analysis is that society’s aversion to sanctioning the
innocent cannot be rationalized by or reduced to a concern for deterrence.

This paper discusses results and difficulties of comparing banks' performance based on
publicly available data for the case of Nordea, a pan-Nordic bank created through mergers of
important national banks. The objective of the performance comparison is to determine whether
Nordea's unique strategy of functional intergation across four countries can be advantageous. For stock-market data, however, Nordea does not have stable betas on risk factors, as illustrated by market betas, and thus the comparables method must be used with great care. The Nordea holding company performed about as well as the comparables, both in terms of stock-market and accounting data. Nordea banks in individual countries outperformed comparable holding companies; by arithmetic, Nordea non-bank operations are not as profitable as its bank operations. In event studies, the market views Nordea's acquisitions as adding value.

A constitution is more likely to be accepted if it federalizes those issues that are
widely seen as needing complete harmonization. A constitution is more likely to endure if the
federal government does not have powers that are not vital to it but which may alienate some
member states to the point that the federal government loses legitimacy. It appears vital to
have trade policy at the European Union level; for euro countries, monetary policy is already
federalized. It is not clear that common foreign and defense policies are needed; insisting on
common foreign and defense policies may lead to conflicts within and across member states
that severely weaken the Union, conceivably contributing to eventual collapse. Insisting on
harmonization of commercial codes does not have the destructive potential of attempting
completely to harmonize defense and foreign policies; it may, however, lead to needless
conflict that helps drain the reservoir of goodwill that the European Union will need for
dealing with other conflicts amongst member states.

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In 1992 the Cadbury Committee report on the financial aspects of corporate governance was
published. The Committee had been established following the failures of a number of high
profile businesses in the UK which had shaken confidence in the market. Some nine years
later, in 2001, the collapse of Enron sent shockwaves through the US market. As a result of the
Enron collapse and various other high profile scandals in the years since its occurrence, the US
is examining its own corporate governance structures and provisions to determine how these
might be improved and help avoid another Enron. The EU similarly is developing principles
and legislation to improve corporate governance, and scandals such as Royal Ahold and
Parmalat have helped drive further governance reforms.
In this paper we detail the development of corporate governance codes in the UK and the
adaptation of similar codes in the EU. We discuss the role of the financial sector in corporate
governance and how principles for regulation and supervision of the financial sector
complement codes of conduct and legislation in the area of corporate governance.
JEL Classification numbers: G34, G28, G22, G23
Keywords: corporate governance, financial sector; institutional investors.

Nordea is the first major international bank planning to operate important host country activities in branches as the Second European banking directive envisions rather than as subsidiaries. Nordea is the result of mergers of roughly equal-size universal banks in four Nordic countries with the intention to reap economies of scale and scope by providing services in an integrated organization. Nordea has so far operated under a legal structure with subsidiaries in the host countries. When the new branch organization is implemented, EU directives specify that the home country is responsible for supervision, regulation as well as deposit insurance. Supervisors in all involved countries are challenged by this prospect and they are negotiating to obtain an acceptable division of responsibilities. We argue that the Nordea case offers an opportunity to implement the EU's vision and to develop institutional foundations for substantial market discipline in banking. In particular, distress resolution and insolvency procedures for banks must be made rule based and credible for host country authorities to accept home country control.

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Abstract
We analyze firms’ incentives to cluster in an industrial district to benefit from
reciprocal technology spillovers. A simple model of cumulative innovation is presented
where technology spillovers arise endogenously through labor mobility. It is
shown that firms’ incentives to cluster are the strongest when the following three
conditions are met: 1) technological progress is rapid; 2) competition in the product
market is relatively soft; 3) the probability of a single firm to develop an innovation
is neither very high nor very low. We show that some trade secret protection is always
beneficial for firms’ profits and stimulates clustering. Excessive protection may
impede technology spillovers and reduce firms’ incentives to cluster.
JEL Codes: J3, K2, L1, O32, O34.
Keywords: Cumulative innovation, industrial districts, intellectual property rights,
technology spillovers.